Second practice: second entity?22 Jan 2019 - Simon Palmer - Practice Sales Business Broker Vet Practice Sales
There comes a time in every successful veterinary practice owner’s career when they consider opening another branch or buying another practice. This juncture represents a possible turning point in their personal fortune. It introduces an opportunity to grow their wealth by expanding the scale and scope of their business interests and, at the same time, it also introduces new complexities and risks into their life, which have the potential to bring down what they have built thus far.
Much of the complexity and risk that is introduced at this point will be dictated by structural decisions that the business owner makes. In particular, will they choose to establish a separate entity and ABN for the new practice, or own it under the same ABN as their old practice?
The arguments for using a single entity
Predominantly, owners choose to establish multiple businesses in the same entity for the following reasons:
1. Reduced initial outlay
Setting up a new business entity involves accounting and legal expenses, from structuring advice and the establishment of entities and registrations with appropriate regulators. If you choose to operate your second (or third) practice under the same structure, you can save yourself these costs.
2. Reduced recurring accounting and bookkeeping
Each entity that you operate out of requires regular BAS statements and tax returns. As a result, operating out of one structure usually involves reduced financial records to maintain and reduced financial compliance obligations. This in turn can translate into reduced bookkeeping and ongoing accounting fees.
3. Reduced administrative burden and banking fees
Operating under one structure also reduces the administration burden on owners, as there is no need for new invoice templates or bank accounts. Many systems and processes are in place from the existing practice, and it’s just a matter of piggy-backing off these for the new clinic.
Put simply, owners who proceed with this option believe it to be cheaper, and generally less of a hassle to manage day-to-day. Whilst this may hold true in the short term, this approach may be inadvertently crystallising significant headaches in the future.
The arguments for setting up multiple entities
There are significant advantages of separating practices into different entities. These include:
1. Risk mitigation and asset protection
Asset protection is a fundamental consideration when establishing the entity from which to conduct business trading.
Most people will be aware that business owners typically do not hold practices in their personal name, and prefer to do so within a company or trust structure. It ensures a level of insulation for their personal wealth, so that any potential clinical or business risks (and failings) are contained within the trading entity, and there is no risk of contamination to personal assets.
This same logic can be applied when choosing a structure in which to own a second business venture.
Establishing different entities for different practices provides an increased level of asset protection and risk mitigation.
Although owners will always aspire to operate a strong performing practice, the unfortunate reality is that not all practices are successful and, in today’s competitive environment, many do in fact fail.
If this was to occur, and a failed practice is owned by the same entity, all other assets (including any other practices!) within the entity will be at risk to cover any outstanding liabilities and obligations. Consider all the hard work required to establish a successful practice – for that to potentially be undone by a new and unrelated business venture would be devastating.
2. Easier strategic planning
Most owners of multiple practices would recognise the benefits of having clear information to help them assess each practice separately. Most owners of multiple practices have the best of intentions in this regard. However, as the added responsibility and workload of running multiple practices takes hold, when practices are held in a single entity, this often falls by the way side. Lines are blurred and costs are combined as one.
This, in turn, can have numerous impacts:
- Forecasting and budgeting for each location gets less accurate
- Decision-making for each business becomes compromised
- Allocation of resources like time, effort and money can become poor, because of the lack of clarity
3. Simplified exit strategy if selling one of the practices
If you own more than one practice under the one business structure, selling them becomes more complicated.
Of paramount importance to any buyer is profit and, if the expenses of each location haven’t been diligently kept separate, assessing the businesses separately can feel like trying to unscramble an egg. For example:
- To allocate a wage/salary cost to each location, you could look at the hourly rate of each employee and their work schedule.
- To allocate supplies/consumables, you could work out a ratio corresponding to production in each practice.
- To allocate lab, you might look at the relevant item numbers charged at each practice and allocate the lab bill accordingly.
However, it is important to realise that:
- The above methodologies are estimates and best guesses. They are not exact.
- It can be impossible to verify how accurate the allocation has been.
- Allocating expense categories within the one entity across practices can be easily manipulated.
- When selling, this lack of verifiable expenses creates a risk for a buyer and the bank that is supplying finance to them.
- The lack of verifiable allocation creates a complexity hurdle that could be considered a put-off for potential buyers and reduce the price achievable upon a sale.
What if I already have multiple business interests under the one entity?
If you already have multiple business interests under the one entity, it may be hard to get the asset protection and clarity/ verification of business performance without restructuring, and this can be a costly exercise. If you decide that the benefits of restructuring are not worth the expense, it is possible to create cleaner accounts of several businesses under the one ABN, for the purposes of (strategic or) exit planning.
Here are some procedural tips that you can implement in your practice that would help make your accounts easier to assess (and possibly sell) separately:
- Create separate bank accounts for each location.
- Eliminate staff-sharing across sites, or keep it to a minimum.
- Brand the practices separately and have separate websites and phone numbers.
- Get separate advertising (AdWords, Yellow Pages, etc.) accounts for the separate sites.
- Try to get separate accounts for separate lab and consumables (it is possible to still get economies of scale discounts with more than one account).
Deciding to isolate interests into separate entities will increase some costs in setup and maintenance, however, saving yourself these costs is often a false economy. These additional costs are more than outweighed by:
- The increased visibility that the owner gains into their individual performance,
- Their ability to act confidently on these insights when allocating resources,
- The increased insulation their interests gain from possible risks, and
- Enhanced options when exit planning.
It would be prudent for anyone planning on purchasing their second practice (or second business) to get structural advice from an accountant familiar with the vet industry. If you already have your business interests in one entity and are planning an exit, any good broker or accountant familiar with vet practices should be able to give you advice for how to clean up your books, so that the fortunes of each practice are more easily understood and examined.